Social Security is another issue, he says. If you take it along with IRA distributions, you can push yourself into higher tax brackets and pay higher effective tax rates. While the conventional wisdom suggests it’s better to take Social Security later, perhaps at age 70, it depends on the client.
Your health and life expectancy play a part in this, he says. “If you have some health issues, taking [Social Security] early is going to make more sense,” he says, even if it means you give up the 8% benefit increase by waiting from your full retirement to age 70 to take the benefit. However, it’s more complicated for married couples, because then you must think about the survivor benefit. If the unhealthy spouse earns more, “in that example it could make sense for even the unhealthy spouse to wait to age 70 because you’re going to have Social Security paying out over two lives.”
Forrest Baumhover, a CFP with Lawrence Financial Planning in Tampa, Fla., says, “When we run retirement plan projections, we assume [in Florida] that the last three years of someone’s life will be spent with some sort of long-term-care need, whether it’s in a facility, whether they hire someone to do long-term care.” The baseline assumption is $60,000 a year for that care in today’s dollars compounded at 5% interest. The number seems extreme for someone 30 years out from retirement, but the firm uses it to show clients how they will spend exponentially more in the last three years than they will in even the first 10 years of retirement just doing things on their bucket list.
Not A Budget, An Education
The amount they choose to spend has been coordinated so that they can spend that money yet still make assumptions for that longer-term need, Baumhover says. That’s why he looks askance at things like the early-retirement FIRE movement. “The FIRE movement hasn’t matured to the point that they are talking about things like long-term care,” Baumhover says. “Saving 40% of your income doesn’t work when you’re retired to spend outsized amounts of money on things that you have no idea about in your 40s.”
Education is important for his clients. “I hesitate to say the word ‘budget’ because we don’t budget for people. But we do identify that big elephant down the road so that when we go back from that, we can help them manage their cash flow more effectively.”
The EBRI compiled its data from the Health and Retirement Study (HRS) 2014 and the Consumption and Activities Mail Survey (CAMS) 2015.